Phoenix Group Fixed Income investor lunch 2 October 2017 1
Agenda Business overview and financial highlights Jim McConville | Group Finance Director Debt and corporate structure Rashmin Shah | Group Treasurer Managing Phoenix’s market and longevity risks Simon True | Group Chief Actuary Closing remarks and Q&A Jim McConville | Group Finance Director 2
Business overview and financial highlights Jim McConville 3
Phoenix is the UK’s largest closed fund consolidator What we do We acquire and manage life insurance funds which no longer actively sell new life or pension policies and run-off over time (“closed funds”) Unlike open life businesses, this means that the capital requirements of our operating life companies decline as policies mature, releasing excess capital in the form of cash We have a cost effective and scalable administration platform with a variable cost base. Policy administration is outsourced Management track record of delivering incremental value through “The Phoenix Way” Key statistics 6.1 £3.0 £75 FTSE 4 million billion billion 250 Policyholders Market Assets under and STOXX Separate UK capitalisation management Europe 600 life companies indices 4
Key highlights in HY17 • Strong cash generation of £360 million in HY17 Strong • PGH Solvency II surplus of £1.7 billion, 166% coverage ratio (1) financial performance • Interim 2017 dividend of 25.1p, a 5% increase on the 2016 Final dividend • Expected capital and cost synergies from acquisitions ahead of plan Integration • £282 million of cash released from AXA acquisition to date ahead of plan • Issuance of £835 million of Tier 2 and Tier 3 subordinated debt Strengthened • Full repayment of bank debt in August 2017 balance sheet • Rating upgrade from Fitch Ratings in July 2017 to A+ (2) • Industry changes making divesting closed funds more attractive for vendors Prospects for • Opportunity to compete on selective transactions in the annuity market future growth (1) Estimated HY17 Solvency II capital position pro forma for Tier 2 bond issue in July 2017 and assumes dynamic recalculation of transitionals as at 30 June 2017 (2) Insurer Financial Strength rating of Phoenix Life Limited and Phoenix Life Assurance Limited 5
Acquisition benefits ahead of plan 1 2016 - 2020 2021+ Better than expected AXA Wealth with £282m by HY17 £0.3bn £0.2bn Cash flows 2016 - 2020 2021+ On track, with £74m Abbey Life by HY17 £0.5bn £1.1bn 2 Increased target of £13m - £15m AXA Wealth On track by FY17 Cost synergies Abbey Life £7m by HY18 On track 3 Finance and 3 at HY18 Actuarial 9 at FY16 On track systems 4 Core Life 1 in HY18 Operation 4 in FY16 On track locations 5 On track and within £175m cap with risk sharing of between 10-20% Indemnity expectations 6
The Phoenix Group generates predictable long-term cashflows: £2.8bn long-term cashflow target with £1.0-£1.2bn expected in 2017-18 Illustrative future cash generation (1) £2.8bn target £4.5bn £1.0 – £1.2bn target £360m in HY17 £486m £265m £221m 2016 2017 2018 2019 2020 2021+ Illustrative future cash generation (excluding any management actions) Organic cash generation Management actions (1) Not to scale 7
The Group’s cash generation supports its debt obligations Illustrative uses of cash from HY17 to 2020 (£bn) £0.1bn £0.2bn £0.3bn £0.2bn £2.0bn £0.7bn £1.2bn £0.7bn HY17 holding Cash generation Operating Pension Debt interest over Debt repayment Dividends over Illustrative holding company cash over 2017-2020 expenses over contributions over 2017-2020 2017-2020 company cash at 2017-2020 2017-2020 FY20 (1) (2) (3) (4) (5) (6) (7) (1) HY17 holding company cash of £691m (2) £2.8bn 2016-2020 cash generation target, less £846m generated in 2016 and H1 2017 (3) Illustrative operating expenses of £30m per annum over H2 2017 to 2020 (4) Pension scheme contributions estimated in line with current funding agreements. Comprising £20m in H2 2017 and £40m p.a. from 2018 to 2020 in respect of the Pearl scheme, £2.5m in H2 2017 in respect of the PGL scheme, and £31.4m in H2 2017 and £8.8m p.a. from 2018 to 2020 in respect of the Abbey Life scheme Includes interest on the Group’s listed bonds, excluding interest on PLL Tier 2 bonds which are incurred directly by Phoenix Life Limited (5) (6) Net debt repayment includes £166m of RCF repaid on 8 August 2017 (7) Illustrative dividend assumed at cost of £99m in H2 2017 and £197m per annum over 2018 to 2020 8
Beyond 2020, there is an expected £4.5 billion of cash flows to emerge, before management actions Illustrative uses of cash from 2021 onwards £0.1bn £1.6bn £4.5bn £4.1bn £1.2bn Illustrative holding company 2021+ cash generation Payment of outstanding Outstanding shareholder Illustrative holding company cash at FY20 pension contributions borrowings cash over 2021+ available to meet dividends, interest and (1) (2) expenses (1) £30 million of pension contributions in 2021 in respect of the Pearl scheme, and £8.8m p.a. from 2021 to 2025 and £2.4m in 2026 in respect of the Abbey Life scheme (2) Face value of shareholder borrowings 9
PGH Solvency II surplus has been strengthened in HY17 Shareholder Capital Coverage Ratio (1) Solvency II Coverage Ratio (1) 166% 139% 137% 123% Surplus Surplus Surplus Surplus £1.7bn £1.1bn £1.7bn £1.1bn £4.4bn £6.5bn £4.0bn £6.0bn £4.9bn £4.8bn £2.9bn £2.7bn HY17 (pro forma) FY16 (pro forma) HY17 (pro forma) FY16 (pro forma) Own Funds SCR Own Funds SCR (1) Estimated HY17 Solvency II capital position pro forma for Tier 2 bond issue in July 2017 and assumes dynamic recalculation of transitionals as at 30 June 2017. Shareholder Capital Coverage Ratio excludes both unsupported with-profit funds together with the PGL pension scheme 10
Debt and corporate structure Rashmin Shah 11
Refinancing of bank debt now complete. Balance sheet strengthened Debt actions in 2017 Current debt structure Maturity of £900 million RCF Quantum and type of debt (1) extended to 2021 Subordinated Senior Bank debt £3.2bn 19% RCF repaid in August 2017 and currently fully undrawn £1.6bn 81% 92% £300 million Tier 3 bond issued 8% in January 2017 2011 August 2017 Own Funds by Capital Tier (HY17) £150 million Tier 3 tap issue and Bonds £6.5bn senior bond tender in May 2017 Tier 3 £0.6bn £1.0bn Tier 2 US$500 million Tier 2 bond issued in July 2017 Tier 1 £4.9bn £4.8bn Credit rating Ratings upgrade from Fitch in July 2017 to A+ (2) upgrade PGH tiering of Own Funds PGH SCR (1) As at 8 August 2017, following full repayment of RCF (2) Insurer Financial Strength rating of Phoenix Life Limited and Phoenix Life Assurance Limited 12
Fitch’s confidence in Phoenix credit demonstrated Fitch Ratings PLL and PLAL IFS rating A+ PGH A PGH £122m Senior Bond A- PGH £428m Subordinated Tier 2 Bond BBB PGH US$500m Subordinated Tier 2 Bond BBB PGH £450m Subordinated Tier 3 Bond BBB Outlook Stable Very strong capitalisation and Strong position in niche market Low investment risk leverage • Largest specialist consolidator of • Fitch views Phoenix’s capitalisation • With-profits and unit-linked focus as ‘Extremely Strong’ based on the closed life assurance funds in the UK limits investment risk agency’s Prism factor -based capital • Business model does not limit Ratings • With- profits funds’ investments model Level aligned with capital positions • Strong regulatory capital • Acquisitions in 2016 prove execution • Fixed-interest investments of high • Strong financial leverage of business model quality • Strong debt service capabilities & • Scalable operations • Sophisticated ALM and strong financial flexibility and good fixed liquidity charge coverage • Diversified product portfolio • Strong operating profitability Source: Fitch Rating report August 2017 13
Solvency II now managed at the level of Phoenix Group Holdings and onshoring process is progressing Solvency II structure is now simplified Next steps for onshoring Solvency II capital position HY17 reported at PGH level Group solvency (PGH) Phoenix Group • Partial Internal Model (1) Holdings • Group capital now managed at H2 2017 Head office moved to UK Phoenix Group Holdings (previously at PLHL level) Cash H2 2017 remittances Governance simplification Individual company solvency Phoenix Life Mid • Capital policies held on top of SCR Prospectus issued to approve new companies UK plc topco 2018 • Free Surplus represents excess over capital policy and can be Mid distributed to holding companies as Corporate structure simplification cash 2018 completed Application to bring Abbey Life onto the Group’s Internal Model to be made to the PRA in H2 2017 (1) 14
Phoenix Group’s funding strategy • Gearing Maintain a gearing range of 25-30% based on Fitch methodology • Rating Maintain investment grade rating • To support growth Future issuance • Refinancing as existing debt matures • £900 million RCF available for acquisition funding Acquisition financing • Subsequent refinancing into subordinated debt markets 15
Managing Phoenix’s market and longevity risks Simon True 16
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